Remote working has led to significant declines in rental income, occupancy, lease renewal rates and market rents in the office sector. Getty Images
The work-from-home era, spurred by the pandemic, is decimating the office sector, with rising vacancy rates and falling property values. And a set of researchers who had previously estimated the effect of remote working on the value of office buildings, have revised their assessment, apparently suggesting that the situation is worse than they thought.
In an article published last year, researchers at New York University and Columbia University estimated a 28% decline in New York office values by 2029, totaling a loss of $49 billion. And in their model, that equates to $500 billion in “value destruction” nationwide. The researchers – Arpit Gupta, Vrinda Mittal and Stijn Van Nieuwerburgh – revised their estimate this month in the latest version of their paper, titled: “Work From Home and the Office Real Estate Apocalypse”. They now see a 44% decline in New York office value by 2029 and a nationwide value destruction of, as they say, $506 billion in just three years, from 2019 to 2022. .
The reason for their revised, but darker assessment?
In their article, the authors claim that remote working has led to a significant drop in rental income, occupancy, lease renewal rates and market rents in the office sector within commercial real estate. . All of this has affected cash flow, at a time when the Federal Reserve has been aggressively raising interest rates. Although interestingly, they found that lower quality office buildings were more susceptible to the shocks listed above and were more likely to become a “locked asset”, they wrote. There is still an underlying uncertainty in their model, which they note, the future of remote work.
Studying data on rental levels from more than 100 office markets in the United States, the authors found an 18.51% drop in rental income between December 2019 and December 2020, just months after the start of the pandemic. The quantity of new leases signed in square feet and the rents of new leases signed have also decreased over the same period. Meanwhile, vacancy rates in several major markets are at record highs, the authors wrote, citing New York, which has an office vacancy rate of more than 20% in the first quarter of this year. Additionally, the authors said they found a “direct link” between companies’ remote work policies and reductions in their actually rented office space.
“The main conclusion of our analysis is that remote work is massively disrupting the value of commercial office real estate in the short to medium term,” the authors wrote.
Yet the effects are not uniform across the country or between properties. The authors found that higher quality buildings, i.e. buildings with higher rents that were built more recently, “appear to be doing better”, which they say is consistent with the idea that companies need to improve the quality of offices so that workers want to come back. Additionally, they found that cities with greater exposure to working from home experience larger declines in office demand, which is clearly illustrated in these two examples. Looking at San Francisco and Charlotte, they found that the former’s office sector saw larger declines, which is to be expected as office buildings in San Francisco have been hit particularly hard by the shift to remote working. Yet both markets have seen declines in office valuations.
“We calculate a reduction in the value of office stock between the end of 2019 and 2022 of $69.6 billion for NYC, $32.7 billion for San Francisco and $5.1 billion for Charlotte,” the authors wrote. authors. “For the remaining office markets, we combine market-specific rental revenue declines with valuation ratio changes for NYC to calculate the decline in value. Nationally, we see a decline of 506.3 billion in office value over the three-year period.
The largest declines in property values by dollar losses during this three-year period were seen in New York, San Francisco, Los Angeles, San Jose and Boston, which the authors say could affect governments locals that rely heavily on property taxes, setting off an “urban loop of doom”.